Cost Accounting

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Cost Accounting
Introduction

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Cost and management
accounting
 Provides management with costs for
products, inventories, operations or
functions and compares actual to
predetermined data
 It also provides a variety of data for
many day-to-day decision as well as
essential information for long-range
decisions

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Functions of managerial
accounting
 Determining the cost
 Providing relevant information for better
decision-making
 Providing information for planning,
control, decision-making and
application

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Planning
 Deals with the estimation of product
costs, setting up of costing system to
record cost data, preparation of cost
standards and budgets, planning of
materials and manpower resources,
analysing cost behavior with changes in
levels of activity

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Control
 Deals with the maintenance of product
costing record, comparison of actual
performance with standards or budgets,
anlaysis of variances, recommendation
of corrective actions, controlling cost to
ensure operational efficiency and
effectiveness

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Decision-making
 Deals with whether it is more profitable
to make or buy a component, determine
the economic order quantity and
production batch size, replace fixed
asset, add or drop products, decide
pricing

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Application
 Cost accounting has extended from
manufacturing operations to a variety of
service industries such as hotels,
bands, airline, etc
 Cost accounting system should be
flexible and adaptable to meet the new
business environment and the changing
nature of the company

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Element of cost
 Cost object
 Cost
 Cost unit
 Cost centre
 Profit centre

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Cost object
 It is an activity or item or operation for
which a separate measurement of costs
is desired
 E.g. the cost of operating the personnel
department of a company, the cost of a
repair fob, and the cost for control

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Cost
 It is the amount of expenditure incurred
on a specific cost object
 Total cost = quantity used * cost per
unit (unit cost)

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Cost unit
 It is a quantitative unit of product or
service in which costs are ascertained,
e.g. cost per table made, cost per metre
of cloth

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Cost centre
 It is a location or function of an
organisation in respect of which costs
are ascertained
 E.g. the rent, rates and maintenance of
buildings; the wages and salaries of
strorekeepers

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Profit centre
 It is location or function where
managers are accountable for sales
revenues and expenses
 E.g. division of a company that is
responsible for the sales of products

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Cost classification
 Direct cost
 Indirect cost (overhead)

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Direct cost
 Cost that can be identified specifically
with or traced to a given cost object
 The direct costs consist of the following
three elements:
 Direct materials
 Direct labour
 Direct expenses

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Direct materials
 The cost of materials – the cost of
materials used entering into and
becoming the elements of a product or
service
 E.g. fabrics in garments

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Direct labour
 The cost of remuneration for working
time
 E.g. assembly workers’ wages in toy
assembly

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Direct expenses
 Other costs which are incurred for a
specific product or service
 E.g. royalties

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Indirect cost (overhead)
 Cost that cannot be identified
specifically with or traced to a given
cost object
 They are identified with cost centres as
overheads
 Indirect materials
 Indirect labour
 Indirect expenses

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Indirect materials
 Such as stationery, consumable
supplies, spare parts for machine that
assist to the production of final products

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Indirect labour
 Such as salaries of factory supervision
and office staff that do not directly
involve in production of the final product

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Indirect expenses
 Such as rent, rates, depreciation,
maintenance expenses that do not have
instant relationships with the
manufacturing processes

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Cost accumulation
•Prime cost = direct materials + direct labour + direct expenses
•Production cost = Prime cost + factory overhead
OR
= Direct materials + Conversion cost
*Conversion cost is the production cost of converting raw materials into
finished product
•Total cost = Prime cost + Overheads (admin, selling,distribution cost)
OR
= Production cost + period cost (administrative, selling,
distribution and finance cost)
•Period cost is treated as expenses and matched against sales for calculating
profit, e.g. office rental

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Cost coding
 A code is a system of symbols
designed to be applied to a classified
set of items to give a brief, accurate
reference, facilitating entry, collation
and analysis
 Coding is important in modern
computerised accounting systems for
catergories various composite
accounting items

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Reasons
 To reducing error owing to descriptions
 Enable easy recalling
 Reduce computer file size as a code

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Cost behaviour
 Costs can be classified into variable,
fixed, semi-variable, or step-costs
according to how they behave with
respect of changes in activity levels

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Variable cost
 It increases or decreases in direct
proportion to levels of activity, but the
unit variable cost remains constant
 E.g. cost of food served in a restaurant

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Fixed cost
 Total fixed cost remains constant over a
relevant range of activity level but unit
fixed cost falls with an increase in
activity volume

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Semi-variable cost
 It processes characteristics of both
fixed and variable cost
 It increases or decreases with activity
level but not in direct proportion

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Step cost
 It remains constant for a range of
activity levels, then, on further increase
in activity, the cost jumps to a new level
and remains constant over a certain
range until the next jump occurs

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Cost for stock valuation
 Unexpired and expired cost
 Product and period cost

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Unexpired cost
 Unexpired costs are the resources that
have been acquired and are expected
to contribute to the future revenue
 They will be recorded as assets in
current period
 They will be charged as expenses when
they have been consumed in the
generation of revenue

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Expired costs
 Expired costs are the expenses
attributable to the generation of revenue
in the current period

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Product cost
 Product cost are related to the goods
purchased or produced for resale
 If the products are sold, the product cost will
be included in the cost of goods sold and
recorded as expenses in current period
 If the products are unsold, the product costs
will be included in the closing stock and
recorded as assets in the balance sheet

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Period cost
 Period cost related to the operation of a
business
 They are treated as fixed cost and
charged as expenses when they are
incurred
 They should not be included in the
stock valuation

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Comparison of cost,
management and financial
accounting

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Meanings
 Financial accounting
 Cost accounting
 Management accounting

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Financial accounting
 Provides information to users who are
external to the business
 It reports on past transactions to draw
up financial statements
 The format are governed by law and
accounting standards established by
the professional accounting policies

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Cost accounting
 Is concerned with internal users of
accounting information, such as
operation managers
 The generated reports are specific to
the requirement of the management
 The reporting can be in any format
which suits the user

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Management accounting
 Comprises all cost accounting functions
 The accounting for product and service
costs, management accounting extends
to use various internal accounting
reports for planning, control and
decision making

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Cost and management accounting
Vs.

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Management
(cost)accounting
Nature Records material,
labour and
overhead costs in
product or job
Reports produced
are for internal
management and
contol
Records company
transaction events
External financial
statements are
produced
Accounting
system
Not based on the
double entry system
Follows the double
entry system

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Management
(cost)accounting
Accounting
principles
No need to use
accounting principles
Adopt any
accounting
techniques that
generates useful
accounting
information
Use Generally
Accepted Accounting
Principles for recording
transactions
Users of
information
Used by different
levels of management
or departments
responsible for
respective activities
Used by external
parties: shareholders,
creditors, government,
etc

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Management
(cost)accounting
Operation
guidelines
or
standards
Based on
management
instructions and
requirements
Conforms to company
Ordinances, stock
exchange rules,
HKSSAPs
Time span Reports are
prepared whenever
needed
They may be
prepared on a
weekly or daily basis
Reports are prepared
for a definite period,
usually yearly and half
yearly

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Management
(cost)accounting
Time focus Future orientation:
forecasts, estimates
and historic data for
management
actions
Past orientation: use
of historic data for
reporting and
evaluation
Perspectiv
e
Detailed analysis of
parts of the entity,
products, regions,
etc
Financial summary of
the whole orgainisation

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Cost accounting
vs.
Management accounting

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Management
accounting
Cost accounting
Objective To provide
information for
planning and
decision making by
the management
To ascertain and
control cost
Basic of
recording
Concerned with
transactions related
to the future
Based on both present
and future transactions
for cost ascertainment

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Management
accounting
Cost accounting
Coverage Covers a wider
area: financial
accounts, cost
accounts, taxation,
etc.
Covers matters
relating to
ascertainment and
control of cost of
product or service
Utility Only the needs of
internal
management
The needs of both
internal and external
interested groups

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Management
accounting
Cost accounting
Types of
transactions
Deals with both
monetary any non-
monetary
transactions,
covering both
quantitative and
qualitative aspects
Deals only with
monetary transactions,
covering only
quantitative aspect

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